2015: Another Good Year Unless “Something Happens”

Life Science stocks had another big year in 2014 up 48% tracking gains for the overall healthcare sector up 35%. Over 10 years the return is 300%! The move up was not a straight line as there were  two major corrections in April 2014 after the Q1 “bio-bubble” and again in October which tested investors' mettle. We have developed a market model over the years that provides a rationale for the bull market in biotech stocks.  However as more investors become knowledgable of product breakthroughs with broader media coverage and as institutions throttle ever more money into the industry, we can get to an overbought situation with a severe correction. In the meantime bullish sentiment dominates.

We have identified  unique aspects of the life science market that supports its investment thesis. When the industry was at an earlier stage  there was a shortage of capital because of the high risks of clinical trial failure and a ten year time line for drug development. Today the sector is awash in capital for ETFs, IPOs, M&A and follow-on stock offerings. According to 2014 data from Renaissance Capital the US IPO Market set a 14 year record with 273 IPOs compared to 406 in Year 2000. In 2014 there 100 healthcare IPOs of which 69 were biotech IPOs or 25% of total. Healthcare returns averaged 31.7%. Eight of the Top Ten IPOs were biotech.

Companies in the industry are now well capitalized and new products provide revenue growth. What would change to make investors more cautious?  Will healthcare remain a strong sector or will there be pricing pressures?

Here are some of the key mantras of the bull market:

Stock Valuations Don't Matter-In Billions$

It has become almost a cliche that financial metrics, in particular market capitalization, is not a reason to buy or sell a biotech stock. Biotech stocks without significant revenue are valued on the basis of technology, product pipeline and potential for acquisition by a larger company. Many exciting mid-cap emerging biopharmaceutical companies in the $2-6B capitalization range. These companies and many well financed smaller caps would be most vulnerable to a correction but they are currently in the “sweet spot” of the market.